Hong Kong Stock Funds Continue to Adjust as Multiple Capital Sources "Go Against the Market" to Enter

Since March, the Hong Kong stock market has generally remained volatile, with fund performance remaining weak. However, southbound capital has continued the trend seen in the first two months of this year, showing an “against the trend” inflow, with single-day net purchases even breaking previous records. In the view of institutions, external shocks may cause the Hong Kong market to remain volatile in the short term. Current valuation levels are already quite low, and the recovery of listed companies’ profits may become an important market influence.

Southbound capital has been buying for three consecutive months

On March 11, southbound capital had a net purchase of HKD 3.448 billion. Earlier, on March 9, the net purchase on that day broke records. Wind data shows that on that day, net purchases reached HKD 37.213 billion. The previous record for a single-day net purchase by southbound capital was HKD 35.876 billion on August 15, 2025.

Southbound capital refers to mainland funds investing through the Shanghai-Hong Kong and Shenzhen-Hong Kong Connect programs, targeting stocks included in the Hong Kong Stock Connect. It is also a significant active fund source in the Hong Kong market. Its net buying and selling activity serves as an important indicator of market sentiment. Looking back at 2025, the total net purchase of southbound funds for the year was HKD 1.40 trillion, the highest ever since the launch of the Shanghai-Shenzhen-Hong Kong Connect in 2014. The influx of southbound capital played a key role in the valuation recovery of the Hong Kong market in 2025.

In the first three months of this year, the net buying trend of southbound capital has continued overall. Wind data shows that as of March 12, the total net purchase since March is HKD 14.615 billion. In January and February, despite significant market pullbacks, southbound capital still net purchased HKD 68.971 billion and HKD 90.575 billion respectively.

From an industry allocation perspective, the direction of southbound investments is relatively clear, with a high concentration in certain sectors. As of March 12, the top three sectors with the largest net inflows over the past month are Information Technology, Energy, and Industrials, followed by Real Estate. Notably, the net inflow into the Information Technology sector over the past month reached nearly HKD 30 billion.

In addition to southbound capital, the “entry” of funds is also evident in the ETF sector, with ETFs tracking the Hang Seng Tech Index, Hang Seng Internet Technology Index, and other indices showing significant growth in recent months. Wind data shows that as of March 12, ETFs tracking the Hang Seng Tech Index increased by over 31.4 billion units in the past month, ranking among the top in broad-based index ETFs. Additionally, ETFs tracking the Hang Seng Internet Technology Index and the Hang Seng Hong Kong Stock Connect Technology Theme Index increased by 6.01 billion and 1.68 billion units respectively.

Recent Weakness in Hong Kong Stock Funds

Since 2026, the Hong Kong stock market has experienced ups and downs. The market remained bullish in January but saw a clear correction starting in February. Wind data indicates that the Hang Seng Index and Hang Seng Tech Index rose by 6.85% and 3.67% in January; however, in February, the Hang Seng Index fell by 2.76%, and the Hang Seng Tech Index declined by 10.15%. Since March 12, the indices have continued to decline, with the Hang Seng Index down 2.75% and the Hang Seng Tech Index down 1.62%.

The “hot and cold” sentiment in the stock market has also affected fund performance. Among 164 actively managed Hong Kong equity funds (including different share classes), 145 funds posted negative returns over the past month, with three funds such as HSBC Jintrust Hong Kong Stock Connect Dual-Core Strategy losing more than 10% in net asset value within a month. However, looking at year-to-date returns, only 58 Hong Kong equity funds are negative, indicating that the safety margins built from previous gains still hold. Index funds generally perform similarly to their underlying indices; out of 304 Hong Kong index funds, 282 posted negative returns in the past month, with 27 losing more than 10%.

“Recent weak performance in the Hong Kong market is mainly influenced by geopolitical risks, macro hedging, pressure on corporate earnings expectations, and structural divergence in liquidity,” said Jiang Yuting, head of the Financial Products and Research Department at Snowball. She explained that geopolitical factors have caused a surge in global risk aversion, leading funds to withdraw from high-risk, volatile tech growth stocks and flow into defensive assets like oil and gold. As an offshore market, Hong Kong stocks are more sensitive to these shifts. Meanwhile, heavyweight tech stocks in the Hang Seng Tech Index are in a period of high-capital expenditure for AI strategies. Market concerns about short-term profitability from massive computing power investments and R&D costs have put earnings expectations under pressure.

Li Changfeng, head of market strategy at Lianbog Fund, also mentioned the impact of corporate earnings: “The core consumer businesses of Hong Kong tech stocks have not shown clear signs of improvement. Coupled with fierce competition in food delivery and e-commerce, most Hong Kong tech giants’ profits remain unimproved.”

Institutions closely monitor profit recovery

While the market continues to decline, there is also a visible “bottom-fishing” sentiment among investors. What is the outlook for the Hong Kong market? Many institutions believe that, under external shocks, short-term volatility remains the consensus. The profit recovery of listed companies may become a key market factor.

CICC states that the Hang Seng Tech Index may remain volatile in the short term, but valuations are already quite attractive. The key investment focus is on the impact of Federal Reserve rate cuts on liquidity, recommending a “dumbbell” strategy combining high-dividend defensive assets with well-valued tech leaders.

China Merchants Bank Research Institute also believes that the growth and value styles in the Hong Kong market will accelerate their convergence in the near future. High-valuation growth stocks may face pressure. “The main reason is that the weights of defensive sectors like energy and raw materials in the Hang Seng Index are relatively low, while tech and consumer sectors have higher weights. Tech stocks are more sensitive to rate cut expectations, and consumer stocks are more affected by rising costs. Additionally, as an offshore market, foreign investment behavior and global risk appetite fluctuations can amplify Hong Kong’s volatility.”

With the earnings season approaching, the performance of constituent companies of the Hang Seng Tech Index, mainly Hong Kong-listed firms, will be a focus of market attention.

“Entering the earnings season, company performance and outlooks will influence the overall market,” said Cinda International.

Guoxin Securities also plans to closely monitor when the bottom of the Hang Seng Tech Index’s earnings will appear. They believe that tracking the bottom of the index’s earnings is important because: first, the valuation is very low, close to the April last year starting point; second, after the earnings reports, some large companies will restart buybacks, and southbound funds will increase their holdings, gradually improving liquidity; third, losses in food delivery are expected to narrow significantly from Q4, and new car models launched between January and February are also expected to improve.

Jiang Yuting believes that despite short-term pains, the market’s pessimistic expectations may have been fully priced in from a medium- to long-term perspective. On one hand, valuations are attractive: the Hang Seng Tech Index has retreated 25%-30% from its peak, with PE and PB ratios at about 15%, near historical lows, with limited downside. On the other hand, policy support for platform economy and AI is clear, and corporate earnings are expected to gradually improve. Additionally, from a liquidity perspective, although the Fed’s rate path remains volatile, the global tightening cycle is nearing its end. Once external liquidity pressures ease, Hong Kong stocks, as a global valuation bargain, could see a rebound.

Li Changfeng states that AI cloud services in Hong Kong tech stocks are expected to maintain rapid growth. According to Lianbog Fund research, China’s AI token consumption is projected to grow over 100% annually in the coming years, indicating significant profit potential in AI infrastructure and applications. Moreover, travel data during the Chinese New Year holiday shows a recovery in consumption, supporting the trend of economic revival. These factors are likely to sustain strong profit growth in Chinese stocks.